What's Fair Pay for Your CEO?

Q: "Our board's Compensation Committee is at work on the annual exercise of putting together the CEO's pay package, and as usual, I feel that the deck is stacked against us. For instance, in our business sector, it's hard to get realistic CEO compensation benchmarks, so it often seems as if one set of numbers is just as good as any other. Any advice on finding real-world CEO pay levels?"

A: You're not alone in finding executive pay benchmarks vapory, and the problem is worse in some sectors than in others. Fast-growth companies, the young tech startups, heavily international firms, and such unique areas as co-ops and nonprofits often require such specialized CEO talents that benchmarks may not even exist.

But this doesn't mean the Comp Committee's job is hopeless. One of the quickest rules of thumb is "what would it cost to replace him," says Arnold Ross, president of the Ross Companies pay consultants. "If you go to a search firm with this particular job description, along with a particular board mission, say growing the company or tightening controls, they'll tell you what it would take to get a new guy." Still, this is an iffy use of a search firm, and since it always costs more to hire a new person than keep the old one, you're building in some inflation (though you might be able to factor it out later).

You should also be willing to look outside your specific industry for benchmarks based on the company's size, goals, and challenges. "For a new company, build [pay] around the stages of funding" suggests Ken Kaleza of ExecuComp Systems. "Are you at the first or second round, or pre or post IPO?" Pay consultants will often have defensible numbers for these that will transpose for your sector.

Or for that matter, try doing your own survey. Target some similar firms that are not necessarily competitors and tap their public filings. Or for that matter, have a member of your committee call up some of their top pay people (or the heads of their comp committees) to swap notes. A board member carries the clout to get through in these cases, and other firms may be surprisingly willing to pool pay info with you if they get your numbers in return -- their board may be facing the same CEO pay quandary as yours.